As the housing boom winds down the finger-pointing is just warming up.

Did a long-overheated market simply cool or did it have some help? Where did everybody go?

"Every time a boom ends, people are similarly puzzled," said Yale University economics professor Robert J. Shiller, who forecast the tech-stock crash in his 2000 book "Irrational Exuberance" and began casting doubts about the real estate market in 2003.

"I'm not even sure [the cycle is] about to end now, but I have a strong suspicion that the current change in the market is an important turning point," Shiller said.

Last week, home builder Robert Toll, CEO of Toll Bros., one of the country's largest builders, jumped on the blame bandwagon, pointing to terrorism, the war in Iraq and Hurricane Katrina as reasons for the weakened demand for housing.

From Toll to mainstream analysts such as Shiller to 30 or so boisterous blogs devoted to the predicted housing bubble pop, the post-mortem is under way to determine what led the housing market to overheat, possibly to a point of no return.

The list goes on: overly lax lending standards that made homeowners of people who could not afford it; the horde of neophyte investors who overpaid for their acquisitions; and builders throwing up too many houses.

Or maybe, some say, it's housing fatigue: sellers fixated on getting unrealistically high prices and buyers just taking a breather from the binge.

"There was all this cultural stuff that grew up around real estate," said Doug Duncan, chief economist for the Mortgage Bankers Association in Washington. "I think there's a sense of emotional exhaustion."

Without doubt, the market has slowed.

Sales of single-family homes in the Chicago area in July were down 18.6 percent from a year earlier, and condos were off 8.4 percent, according to the Illinois Association of Realtors. Nationally, sales of all types of homes were 11.2 percent lower in July than a year earlier.

David and Erin Kerpel of Deerfield are representative of those statistics. In July they bought a bigger house across the street from where they have lived for three years.

They expected a quick sale of their former residence because their next-door neighbor's nearly identical home sold easily a few months earlier.

But after a few showings they are still waiting for an offer.

"It's dead. The market is dead," David Kerpel said recently. "There are no buyers."

"I'm tempted to say that, yes, the market is dead," said North Side broker Bruce Theobald. "But I pull the `hot sheets' [of sales activity] every day, and houses are going under contract. It just feels slower than it really is."

That's probably because there is an avalanche of homes for sale. In the Chicago area alone more than 95,000 properties are on the Multiple Listing Service of Northern Illinois, fully 40 percent more than a year ago.

Prices still up

Area sales prices were still on the plus side in July, with single-family home prices up 4.3 percent and condos selling for 6.1 percent more than a year ago, the Realtors said.

That may be about to change.

"I'm probably going to say that prices turned negative [in numerous metro markets] this month," when September sales data are released in October, David Lereah, chief economist for the National Association of Realtors, said Tuesday.

On Thursday his organization announced it was revising its annual forecast because potential buyers who are waiting for a better deal were having such an effect on sales.

It said existing-home sales were likely to drop 7.6 percent this year to 6.54 million. A month ago the group thought existing-homes sales would fall 6.5 percent, to 6.61 million.

"For a couple of quarters you'll see price drops from 2 to 5 percent," he said in an interview. "It's going to be short-lived, though. If there's any national downturn, it will probably last a quarter."

That's because Lereah predicts the market will pick up again next year after sellers begin to cut prices this fall.

They will have to, he says, though it's not a pretty prospect for sellers. He says that all talk of the Fed's role, shaky mortgages and irrational speculators aside, what's at the root of the market stall is sellers' reluctance to budge on their asking price.

"We're in transition from a seller's market to a buyer's market, and that transition is costly," he said. "When that happens, there's always a big drop in sales volume because the seller is stubborn.

David Kerpel is a case in point, vowing that he and his wife will not further reduce the price on their house.

"We don't have to, financially. Plus, there's a certain pride in our house," he said of the split-level whose price the couple reduced once, early-on, to $565,000 from $579,000.

They claim they will go no further. "We feel it's worth it," David said.

In the meantime, they are offering the house with a lease-to-buy option and are preparing to move across the street. "It's not the price, it's the economy," he said. "We will wait it out."

Kerpel also wishes the news media would pay less attention to the market.

"Every time there's a story, it doesn't help people's mentality," he said. "People shouldn't go by the headlines. They should go by their own situation."

Broker Theobald said "the non-stop volume of articles on the housing bubble, well, it seems like it did become a self-fulfilling prophecy."

Lereah sees some truth to that. "A lot of Realtors are very angry at the media," he said. "By discussing the boom building and by anticipating the boom busting, I think it did add to some of the negative psychology."

Speculators blamed

Lereah focuses on speculators who acquired properties too high and mortgage products whose interest rates have begun to reset at unaffordably higher rates.

"Basically the speculators and the exotic mortgage instruments--interest-only loans and zero-down payment loans that permitted households to purchase at lofty prices--they emptied the punch bowl at the party," he said.

"This boom would have gone on a little longer if not for them," Lereah said. "They took prices up higher than they should have been."

"In October 2005 Lereah was busy calling the bubble believers `Chicken Littles,'" goes one post in a blog dedicated to criticizing the economist, davidlereahwatch.blogspot.com. "Many of the predictions espoused by the `Chicken Littles' are fast becoming closer to reality. ... David Lereah has lost credibility because of his irresponsible cheerleading."

Lereah counters that he has been forecasting a change for some time. "I've been wrong for three years in a row. I've said we're about to get a correction. For three years, I've said, `This is the year that sales will come down.'

"But now, it's not because mortgage rates went up, it's because of the psychology of the marketplace," he said. "The prices just got too high."

Last week, home builder Robert Toll, CEO of Toll Bros., one of the country's largest builders, jumped on the blame bandwagon, pointing to terrorism, the war in Iraq and Hurricane Katrina as reasons for the weakened demand for housing.

From Toll to mainstream analysts such as Shiller to 30 or so boisterous blogs devoted to the predicted housing bubble pop, the post-mortem is under way to determine what led the housing market to overheat, possibly to a point of no return.

The list goes on: overly lax lending standards that made homeowners of people who could not afford it; the horde of neophyte investors who overpaid for their acquisitions; and builders throwing up too many houses.

Or maybe, some say, it's housing fatigue: sellers fixated on getting unrealistically high prices and buyers just taking a breather from the binge.

Click to expand...

The bolded part is the correct answer, which can be summarized as "Too much cheap money/credit". As in, a glut of money created out of thin air by banks, directed by the Federal Reserve. When you take out a mortgage, that isn't someone's savings account money, it's money created out of nothing.

After a while, the fed can tighten up (recession), or let things go and we get inflation. We had already just come out of a bubble in the late 90's for the same reason (the dot-com bubble), and should have had a worse recession about 4~5 years ago. But then the fed decided to create an even bigger bubble instead of letting the previous one deflate. Now we are probably facing an even bigger correction/recession, and inflation to boot, ie stagflation.

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